Exchange-traded funds (ETFs) are as popular in the crypto world as in the traditional stock market. But there are several nuances to them. In this article, we seek to understand Bitcoin ETF trading and everything there is to know about it.
Understanding Bitcoin ETFs
ETFs are a pooled investment—the money is pooled together and invested in the asset. In this, they are like mutual funds, but they can be traded with ease on a stock exchange
There are many kinds of ETFs. Some ETFs allow investing in a specific asset class, such as gold and crude oil, or sectors like real estate or manufacturing. One can even buy ETFs for indices such as Sensex. The crypto ETFs, including Bitcoin ETF, invest and track crypto as an asset.
What are Bitcoin ETFs?
Tracking assets can be a cumbersome task, given the number of them. That’s where ETFs come in handy. A Bitcoin ETF enables investors to gain exposure to BTC and related assets without doing research, purchasing, or storage. It is ideal for investors who are yet to zero in on a strategy or are not confident about handling crypto.
How do they work
All ETFs track the price of an underlying asset. For Bitcoin ETFs, their underlying asset is the Bitcoin crypto. These ETFs are set up by an exchange, which purchases BTC, securitizes it, and then sells it as fractionalized shares.
The first official such ETF was the Proshares Bitcoin Strategy ETF (BITO).
The advantages and disadvantages of investing in Bitcoin ETFs
The rise of Bitcoin ETFs in the US and the rapid adoption rate in countries such as Canada are key factors behind its popularity. Scores of investors who do not have the time or research to back their decisions prefer this option.
However, management fees and pricing inaccuracies are significant risks.
Approval and listing of Bitcoin ETFs
For an investment to become an ETF, it has to be actively tradeable on a stock exchange. The approvals required for listing a Bitcoin ETF can vary depending on the jurisdiction and exchange.
Regulations and restrictions
In general, a Bitcoin ETF would need to receive regulatory approval to be listed. This typically involves a review of the ETF’s structure, investment strategy, and potential risks for investors.
Several exchanges are yet to approve a Bitcoin ETF, despite multiple proposals. Only countries like Canada and the US offer a couple of Bitcoin ETFs.
The approval process
On the Toronto Stock Exchange (TSX) in Canada, some ETFs, such as the Purpose Bitcoin ETF (BTCC), were popular among investors. Other Bitcoin ETFs that have been listed on the TSX include the CI Galaxy Bitcoin ETF (BTCX) and the Evolve Bitcoin ETF (EBIT). On American exchanges, Bitcoin ETFs such as ProShares Bitcoin Strategy (BITO), Valkyrie Bitcoin Strategy (BTF), VanEck Bitcoin Strategy (XBTF), Global X Blockchain & Bitcoin (BITS), and AdvisorShares Managed Bitcoin Strategy (CRYP) are popular Bitcoin ETF avenues.
Listing of Bitcoin ETFs on stock exchanges
The listing process for Bitcoin ETFs on the TSX involved filing a prospectus with the relevant regulatory authorities, such as the Ontario Securities Commission, and meeting certain listing requirements set by the exchange. These requirements may include minimum assets under management, trading volume, and liquidity. All of that in addition to compliance with various regulatory and reporting standards.
Investing in Bitcoin ETFs
To begin with, an ETF is an investment product that combines multiple stocks or shares into a single unit. For example, let us consider a sample ETF with one hundred popular shares. Given the volatility in the stock market, an individual stock may suffer a huge loss. But an ETF, with a hundred popular shares, is likely to be less affected. And since ETFs are tradeable like any other stock, it is easy to sell.
How to invest in Bitcoin ETFs
Trading or investing in a Bitcoin ETF is similar to buying any ETF. You’ll need to open a brokerage account with a platform if you don’t already have one. But remember, not all brokerage accounts offer the choice to invest in an ETF. You will also need to ensure that there are ample funds in your account.
Next, decide how many shares you want to buy and at what price.
You can either buy spot or futures BTC ETFs. With futures, you agree to buy or sell BTC at a given price on a specific date, regardless of market conditions. Derivatives back them. On the other hand, spot ETFs are one-time purchases that give direct ownership to assets backed by real BTC. At present, there are more regulatory restrictions on spot purchases.
Risks and returns associated with Bitcoin ETFs
It’s important to note that not all brokerage accounts may offer access to Bitcoin ETFs. The availability of these products also depends on your country of residence.
Additionally, investing in these ETFs comes with as many risks as returns. So carefully consider both before investing. It’s important to consult with a financial advisor if you’re unsure about an ETF.
Strategies for investing in them
Fortunately, these ETFs involve the same strategies as conventional stocks and other investments. Investors can buy and hold or use their ETFs as a hedging strategy. Besides, one can also adjust their allocation or use dollar-cost averaging.
How to monitor and manage Bitcoin ETF investments
While there are multiple strategies to boost profits, there is no strategy that you can implement with ignorance. Hence, investors should research as much as possible. It’s important to continually monitor Bitcoin ETFs to increase their profitability.
The future of Bitcoin ETFs
The future of Bitcoin ETFs is, at best, uncertain. That despite several factors catalyzing their growth and adoption in recent years. As interest in Bitcoin grows, investors may want to profit from them while staying safe. And Bitcoin ETFs allow them to dip their toes in without getting into the water. However, one cannot discount the impact of the lack of clarity on the regulatory future.
Impact of regulatory changes
Due to a rough regulatory landscape, Bitcoin ETFs are still evolving. Some countries allow them, while others do not. It took American regulators close to eight years to approve BTC ETFs. As regulatory frameworks become clear and consistent, investors may gain confidence. However, that’s likely to take a while.
The role of institutional investors in the growth of Bitcoin ETFs
Institutional investors, such as hedge funds, pension funds, and endowments, have increasingly shown interest in Bitcoin. If more institutions begin to invest in BTC ETFs, the greater demand could help drive up prices.
The potential of Bitcoin ETFs in diversifying an investment portfolio
Bitcoin ETFs are a great way to diversify your portfolio without taking on any risks associated with storing and trading crypto directly. ETFs are also easier to understand and a great option for newbie investors looking to diversify.
The role of technology in the trading of Bitcoin ETFs
Technology will play an important role in the future of these ETFs. As innovations emerge, they could make trading ETFs more efficient and secure. For example, blockchain technology could potentially create more transparent and secure ETFs. Artificial intelligence and machine learning could help investors make better investment decisions.
Conclusion
Although Bitcoin ETFs may experience less volatility than buying BTC on a crypto exchange, they are still risky. Investors must thus perform comprehensive research before investing. Besides, records should not be used as a benchmark to guarantee future results. You should design a strategy based on your investment goals and risk tolerance. Seeking advice from a financial advisor is not a bad idea, either.
FAQs
Is Bitcoin ETF a good investment?
Investing in a Bitcoin ETF can be a good option for various reasons, but it comes with its considerations:
Convenience: Bitcoin ETFs offer a convenient way for investors to gain exposure to Bitcoin without directly holding the cryptocurrency.
Diversification: ETFs allow investors to diversify their portfolios by including Bitcoin alongside traditional assets.
Market Performance: Some ETFs, like ProShares Bitcoin Strategy ETF (BITO), have demonstrated strong market performance
Which ETF is best for bitcoin?
1. ProShares Bitcoin Strategy ETF (BITO): This ETF is highlighted for its Bitcoin exposure.
2. ProShares Short Bitcoin ETF (BITI): Another option for Bitcoin exposure.
3. Valkyrie Bitcoin Miners ETF: Recognized among the best crypto ETFs based on performance.
4. Bitwise Crypto Industry Innovators ETF (BITQ): This ETF focuses on innovative companies in the crypto economy.
Consider your investment goals and risk tolerance when choosing the most suitable ETF for your needs. Regulatory developments, as covered in Forbes, may impact the availability and landscape of Bitcoin
What is the disadvantage of Bitcoin ETF?
Lack of Ownership: Investing in a Bitcoin ETF means not directly owning the cryptocurrency, resulting in a detachment from the underlying asset.
Management Fees: Bitcoin ETFs may impose management fees, which can reduce overall returns for investors.
ETF Inaccuracy: Drawbacks in the structure can affect the fund’s ability to accurately mirror the underlying asset’s performance, potentially leading to suboptimal returns.
Limits to Cryptocurrency Trading: Bitcoin ETFs may have limitations on cryptocurrency trading, impacting flexibility
Will Bitcoin ETF be approved?
In summary, while the approval status is yet to be determined, anticipation and ongoing dialogue is suggesting the possibility of Bitcoin ETF approval in early 2024.
